Employers filing Form 941 each quarter will need to allocate a bit more time to preparing their second, third, and fourth quarter reports this year. At the end of April 2020, the IRS released a refurbished draft of Form 941 and accompanying instructions. The agency instructed employers to start using the draft form prospectively beginning with reports for second quarter payroll taxes. The draft form is a page longer than the one it replaced and includes new fields that accommodate new payroll tax incentives provided in response to COVID-19-related economic pressures.
What Is Form 941 and Why Did it Change?
Employers use Tax Form 941 Employer’s Quarterly Federal Tax Return to report income, Medicare, and social security taxes that have been withheld from employees’ paychecks. Employers also use this form to calculate and pay their portion of payroll taxes. For most employers, Form 941 is due quarterly on the last day of the month that follows the end of the quarter. This means the remaining due dates for Form 941 for the 2020 calendar year are:
- July 31, 2020 (second quarter 2020)
- October 31, 2020 (third quarter 2020)
- January 31, 2021 (fourth quarter 2020)
In response to COVID-19, the Federal government created three new payroll tax credits and one payroll tax deferral program. The Families First Coronavirus Response Act (FFCRA) created two credits, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act created one credit and the deferral program. These four tax-saving and tax-deferral mechanisms can now be reported on the draft Form 941.
Tax Credit for Qualified Sick Leave
The FFCRA provides a refundable payroll tax credit to employers who provide 10 days of paid sick leave to their workers anytime between April 1, 2020 and the end of the year. The credit is for the full amount of sick leave wages, plus associated health plan expenses and the employer’s share of Medicare tax. The credit should be reported on Form 941 and taken against payroll taxes that employers typically deposit. Any excess can be carried forward to reduce future payroll deposits or can be refunded by filing Form 7200 Advance Payment of Employer Credits Due to COVID-19.
Tax Credit for Qualified Family Leave
The FFCRA expanded FMLA benefits by requiring employers to provide up to an additional 10 weeks of paid family and medical leave to employees who need to care for children whose schools have been closed thanks to COVID-19. The refundable credit is equal to 2/3 of the employee’s regular pay, up to a maximum of $200 per day or $10,000 in total, including health plan expenses and the employer’s share of Medicare tax on those wages. Like the credit for qualified sick leave, this credit reduces employers’ payroll tax deposits, allowing them to retain and utilize those funds immediately.
Employee Retention Credit
The CARES Act created a refundable tax credit for employers who retain certain levels of employment when either (1) government shutdowns required them to wholly or partially suspend their operations, or (2) their gross receipts are less than half of what they were in a comparable quarter in 2019. The credit is 50% of up to $10,000 of qualifying wages paid to employees between March 12, 2020 and the end of the year and can be taken against payroll taxes reported on Form 941. Like the FFCRA credits, excess amounts are refundable.
Payroll Tax Deferral
The CARES Act allows employers to defer depositing and paying the employer portion of social security taxes for wages paid between March 27, 2020 and December 31, 2020. Half of the deferred taxes must be paid by the end of 2021, and the remainder must be paid by the end of 2022. Employers participating in the Paycheck Protection Program (PPP) can only defer payments until their lender forgives their PPP loans. This deferral can work in conjunction with one or more of the above credits but only applies to wages not utilized to obtain one of the other credits.
What’s in the New Form?
The draft Form 941 helps employers calculate each of these four benefits. It breaks out qualified sick leave and family leave wages; reports health plan expenses for those wages; summarizes credits (both refundable and nonrefundable portions); reports deferrals; and details advances from Form 7200. Part 1 summarizes payroll taxes and incentives while Parts 2 and 3 ask for details about the business to determine incentive eligibility and deposit schedules.
Because each incentive is dependent on employers’ use of the others, it’s important to understand how they work in tandem. Our LaPorte advisors can help you determine how best to capitalize on these benefits and can help you collect and tabulate the information your payroll providers will need to fill out the new form accurately.
Because the Form 941 is a draft, it may change before it gets finalized. We anticipate the bulk of the form will stay the same and think it’s safe to rely on the draft form as-is until we are given more information. If you have questions about these tax incentives and want to get a head start on filling out the new Form 941, contact a member of LaPorte’s Accounting Services group.